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First Republic Bank (NYSE:FRC)

Q2 2012 Earnings Call

July 18, 2012 02:00 pm ET

Executives

James H. Herbert, II – Chairman, Chief Executive Officer

Katherine August-deWilde – President and Chief Operating Officer

Willis H. Newton, Jr. – Executive Vice President and Chief Financial Officer

Michael D. Selfridge – Senior Executive Vice President

Dianne Snedaker – Executive Vice President and Chief Marketing Officer

Analysts

Dave Rochester – Deutsche Bank

Ken Zerbe – Morgan Stanley

Erika Penala – Bank of America Merrill Lynch

Joe Morford – RBC Capital Markets

Aaron Deer – Sandler O'Neill & Partners

Casey Haire – Jefferies & Company

Brian Zabora – Stifel Nicolaus

Tim Coffey – FIG Partners

Steven Alexopoulos – JPMorgan

Herman Chan – Wells Fargo Securities

Julianna Balicka - KBW

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Republic Bank’s Second Quarter 2012 Earnings Conference Call. Following the presentation the conference will be open for questions. (Operator instructions) I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer. Please go ahead.

Dianne Snedaker

Thank you, and welcome to First Republic Bank's Second Quarter 2012 Conference Call. Speaking today will be the Bank's Chairman and Chief Executive Officer, Jim Herbert; President and Chief Operating Officer, Katherine August-deWilde; Senior Executive Vice President Mike Selfridge; and Chief Financial Officer, Willis Newton.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on management's current expectations, and are subject to risks, uncertainties, and assumptions. Potential risks and uncertainties that can cause the bank's business and financial results to differ materially from these forward-looking statements are described in the bank's periodic reports filed with the FDIC including the bank's current report on Form 8-K filed today.

In addition, some of the financial information discussed on this call includes non-GAAP financial measures. The bank's earnings release, which was issued this morning and is available on the bank's website, presents reconciliations to the appropriate GAAP measures and explains why the bank believes such measures are useful to investors.

And now, I'd like to turn the call over to Jim Herbert.

Jim Herbert

Thank you, Diane, and thanks to everybody for joining our call today. We are very pleased with our second quarter results. Loans, deposits and wealth management assets all grew very strongly. Credit quality remains excellent. Importantly, book value per share has increased 15% from a year ago. We are very pleased to declare an initial quarterly cash dividend of $0.10 per share. This payout rate represents approximately 15% and we would like to operate in a payout range of 15% to 20% over time.

First Republic continues to perform well across all of our businesses in each of our carefully chosen urban coastal markets. Second quarter results highlight the strength of our business model, even under the currently challenging yield conditions facing the banking industry.

Let me quickly summarize our quarterly numbers. Core net income was up 31% year over year. Core earnings per share, excluding all purchase accounting adjustments, were up 22% year over year to $0.50 per share. GAAP EPS was $0.60 per share after a $0.10 per share one-time charge, which was in connection with the redemption of our REIT preferred. Quarterly loan volume totaled $4 billion, our highest ever, and it was 62% higher than the same quarter last year. Loans outstanding increased 7% in the quarter and 10% for the first half of the year.

Deposits rose by 4% during the quarter and 8% for the first half of the year, and total wealth management assets grew by 6% in the quarter and 14% so far this year. Our asset quality remains very strong. Nonperforming assets at quarter end were at a very low 10 basis points of total assets, or 1/10 of 1%.

On the capital front, our Tier 1Leverage Ratio was 9.55% including the issuance of our new noncumulative perpetual Series B preferred. We raised, net of all redemptions, $85 million of Tier 1 capital in the quarter and through the first half of 2012 we have raised, net of redemptions, $250 million of new Tier 1 capital through two preferred stock offerings. This increase in capital is intended to support the further development of our business and its franchise.

The current low interest rate environment and flatter yield curve present both challenges and opportunities for us. The average yield on our loan portfolio does continue to decline while the average cost of funds cannot decline much further, however, the low interest rates have resulted in a significant amount of home loan refinance and home purchase activity in all of our markets.

This activity level has led to a meaningful increase in new client opportunities for First Republic. We are and we intend to continue to take advantage of this opportunity aggressively.

Now let me turn the call over to Kathy.

Katherine August-deWilde

Thank you, Jim. As Jim indicated, growth was strong across all areas of our business—deposits, loans and wealth management. Quarterly loan originations and wealth management revenues were the highest ever. Home loans were 66% of total loan originations. Of these, 42% were for home purchases. On average, loan balances were 5% higher in the second quarter than in the first quarter of the year.

I’d like to note that First Republic has not altered its credit standards. We continue to lend very conservatively. Each loan is fully documented and fully underwritten. In the second quarter our weighted average loan to value on home originations was 60%.

Deposit-taking was robust. Total deposits grew to $24.2 billion in the quarter, up 4% on average during the quarter. Liquid deposits continued to grow and were up 6% in the quarter and 13% for the first half of the year. Private wealth management also had an excellent quarter. Assets under management grew to $23.3 billion, increasing $1.2 billion for the quarter and $2.9 billion for the first half of the year. These increases are primarily from net new client funds.

Wealth management revenues grew 25% year over year. Our wealth management business is benefitting from the hiring of seasoned wealth management professionals, client referrals and ongoing success in cross-selling bank clients.

I want to take a moment to provide some perspective on the progress of our growth initiatives. We have carefully invested in the franchise over the past two years and we expect these planned investments to continue to produce solid results.

An anticipated consequence of our growth initiatives is a modest reduction in core efficiency. Our efficiency ratio rose slightly to 60.5%. This is within the 58% to 62% range we have discussed on previous calls. Going forward, we look to selectively hire outstanding business bankers and wealth management professionals, but we have substantially completed our new relationship manager private banking hiring for now.

In the second quarter we opened three Preferred Banking offices. We plan to focus on completing the opening of the ten new offices currently in our pipeline over the next 12 to 15 months. Economic conditions in our carefully selected urban coastal markets remains solid. Home sales activity continues to be strong and supply is constrained in each of our markets. Apartment and commercial rents are increasing and vacancies are decreasing. Overall, we are very pleased with the quarter.

Now I’d like to turn the call over to Mike Selfridge.

Mike Selfridge

Thank you, Katherine. Let me talk about the San Francisco Bay area and our business banking activities throughout all our markets. The San Francisco Bay area continues to perform well. In particular, real estate markets remain strong. In Silicon Valley and San Francisco, home prices are rising, inventory levels are declining and multiple offers are increasingly common. Rents for residential and commercial properties are climbing.

Business banking is doing well and continues to be an important contributor to our growth, both in terms of loans and deposits. Business loans outstanding grew 13% for the quarter and 23% for the first half of the year. Business deposits were up 13% in the quarter and now account for 44% of total deposits.

We continue to see good success with our business banking activities throughout our markets. We are primarily focused on venture capital and private equity firms as well as other professional service firms. For example, law firms, medical practices and accounting firms. We also focus on independent schools and other nonprofit organizations.

Business banking is benefitting from the recent hiring of very accomplished bankers. At the same time, we have been successful in executing our strategy, which is to follow our satisfied private banking clients to the businesses and nonprofits which they lead and influence.

Now I would like to turn the call over to Willis.

Willis Newton

Thanks, Mike. In the second quarter our core net interest income was up 7% annualized due to a higher average balance of loans. Our contractual net interest margin decreased 16 basis points to 3.48%. This change was primarily due to declining loan yields, an increase in average cash balances and the absorption of the full expense of higher cost term federal home loan bank advances drawn mostly in the first quarter.

Declining interest rates on new loans, both refinance and purchases, resulted in a decline in our average contractual loan yield of 13 basis points in the second quarter. Despite lower cash balances at quarter end, our average cash balances for the second quarter actually increased 37% compared to the prior quarter. Such increase in average cash balances, which earn only 25 basis points, decreased our overall asset yield by 3 basis points.

On the funding side, our contractual funding costs were unchanged for the second quarter compared to the first quarter. We were able to reduce our contractual cost of deposits from 40 basis points to 38 basis points during the quarter. However, the full quarterly cost of the additional $1 billion of longer term advances offset the benefit of our lower deposit cost.

We had another exceptional quarter for mortgage banking. Our gain on sale of loans sold was 109 basis points compared to approximately 70 basis points last quarter and well above the prior six quarter moving average. This resulted in a gain on sale of $4.8 million for the quarter. For perspective, in the first quarter of 2012 our salary and benefits included extra payroll taxes. Excluding this seasonal variance, I would note that salaries and benefits in the second quarter were up 4% versus the first quarter.

Following the capital transactions that Jim mentioned, our Tier 1 Leverage Ratio climbed to 9.55%. At June 30, our $350 million of noncumulative perpetual preferred stock meet all Tier 1 capital criteria under existing and proposed US and international guidelines.

In closing, let me emphasize that we do not engage in proprietary trading or utilize credit derivatives. We have never originated subprime loans, nor have we invested in foreign sovereign debt. In short, we remain highly focused on executing our simple, straightforward business model.

Now I’d like to turn the call back to Jim.

Jim Herbert

Thank you very much, Katherine, Mike and Willis. In summary, it was a terrific quarter. While we find the pressures on rates and net interest margin challenging like everyone else, we couldn’t be happier with our success in growing the business safely.

To reiterate, these low interest rates have stimulated a tremendous amount of home purchase and refinance activity in our markets. This high level of activity offers us a great number of new relationship opportunities, which we are taking advantage of aggressively. Our Wealth Management business is also firing on all cylinders.

Finally, we are especially gratified by the 15% after-tax increase in book value per share over the past year, particularly in such a low rate environment.

Now I’d like to turn the call back to the operator and we’d be glad to take questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator instructions) Our first question comes from the line of Dave Rochester of Deutsche Bank. Please proceed with your question.

Dave Rochester – Deutsche Bank

Hi, guys. How are you doing?

Jim Herbert

Good afternoon, Dave.

Dave Rochester – Deutsche Bank

Thanks. Nice growth this quarter, by the way.

Jim Herbert

Thank you.

Dave Rochester – Deutsche Bank

Could you guys give some color on the yields for resi arms in the pipeline today, and then if you have it, the all-in presidential yield and the CNI yield?

Katherine August-deWilde

The yield of five-year loans, which are the predominant loan that we’re booking for single families, is 2.67 in July. The income property loans are higher than that.

Dave Rochester – Deutsche Bank

And where would those income property loans range? North of 3% or are they below 3?

Katherine August-deWilde

They are north of 3%, yes.

Dave Rochester – Deutsche Bank

Okay, great, thanks. I saw that money market rates were up a little bit this quarter, you guys had touched on, and not a whole lot of flexibility to move those down. Can you just talk about what the driver was for that increase? Is it competitive pressures, new products? And I guess we should expect those to maybe come in maybe a little bit from here?

Jim Herbert

Dave, they could come in a little bit from here. The pressures move around a little bit depending on competitors, but as you can see from our cash position and the comments we made on the average case position during the quarter, we’re still a little cash rich so we have room to tighten it a little bit maybe.

Dave Rochester – Deutsche Bank

Okay, great, and can you just talk about the size of the loan pipeline versus last quarter? And maybe given the activity you’re seeing, are you thinking that the loan growth rates from this quarter are sustainable at lease near term or should we expect them to decelerate?

Katherine August-deWilde

The pipeline at the end of March versus the pipeline at the end of June is up a bit. The summer can be a little bit slower because clients are on vacations, and so that impacts the closing rates, but at the moment with where our pipeline stands at the end of June it looks to be a strong quarter.

Dave Rochester – Deutsche Bank

Great. Alright, guys, I’ll step back. Thanks.

Operator

Thank you. Our next question comes from the line of Ken Zerbe of Morgan Stanley. Please proceed with your question.

Ken Zerbe – Morgan Stanley

Thanks. Just in terms of the NIM compression this quarter, just want to make sure that we have all the pieces correctly docketed. The -- when we look forward to next quarter, obviously the cash balance, that’s going to help you. I think you said it was 3 basis points of the compression this quarter, so that goes away. The FHLB advances stay so that’s kind of an ongoing issue, lower loan yields. How much -- when you guys think about NIM compression versus -- third quarter versus second quarter, where do you guys end up?

Willis Newton

Hi, Ken. This is Willis. Relative to the NIM of 348 this quarter you are correct that the federal home loan bank costs are included and baked in to that level of NIM, as well as average cash balances of about $1.3 billion, so if those numbers stayed the same, then we would look to see -- we would likely see a similar trend in the contractual loan yield depending on the amount of the new loans that we originated and the rates that we put them on.

We would expect to see a continued trend in the decline in our average loan yields, but we might be able to offset that a little bit with lower deposit costs and/or using some of that excess cash over the next several quarters.

Ken Zerbe – Morgan Stanley

Okay, and I think at one point you guys had given -- this was maybe a quarter or two ago, you had given a blended rate of average new loans. I think it was about 3.25. Do you have an updated blended rate of what’s going on in the books?

Jim Herbert

Let’s move on and, Ken, let us come back to you with that in a minute, okay? We can probably get it in a couple minutes.

Ken Zerbe – Morgan Stanley

Thank you very much. Alright, that’s it.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos of JP Morgan. Please proceed with your question.

Steven Alexopoulos – JPMorgan

Hi, everyone. I wanted to start on the expenses. Several of the non-comp items were up pretty sharply in the second quarter. Was there some type of catch up and how should we be thinking about this run rate from this 171.5 number?

Jim Herbert

Let me start, Steve, but I’m going to ask Willis to weigh in here. One of the things that’s going on, as you know, is we’re opening so many new offices. We’re beginning to pick up the expense and run rates on those and the rentals. We also took on some new office space and furnished it and brought it online and that’s one of the items. We also had some increases buried in the advertising and marketing numbers in the quarter. But, Willis, do you want to pick up from there?

Willis Newton

Well, I think that, as Jim commented, occupancy is on a trend and information systems is on a trend that we had expected with some investment that we’re making. We did have a couple of seasonal things, slight increases in the advertising and marketing line and in the professional fee line that might not repeat themselves quite to the same extent.

And then our other expenses is just the larger operations, the more people that we’ve hired and the bigger company, more origination volume and higher deposit growth.

Jim Herbert

The bottom line to your question, Steve, there’s really nothing that caught us off guard particularly.

Steven Alexopoulos – JPMorgan

Okay, got you. Jim, I wanted to ask you on the loan growth, could you break up the split between originations for purchase versus refi, maybe discuss what you’re seeing on the purchase side?

Jim Herbert

Katherine?

Katherine August-deWilde

Yes, I can do that, thanks. Our purchases were 42% of our home loan originations this quarter. In Q1 they were 29% and for the last half of last year they were in the mid-30s. We are seeing very active purchase markets in all of our markets. The reason that they refi percentages are so high is that because clients are refinancing, and of course, that’s an opportunity for us because it’s an opportunity for us to grow our household.

Steven Alexopoulos – JPMorgan

Got you, and just one final one. The tax rate, the 30.5%, that’s a pretty low rate. I know you said it’s going to be there for the rest of 2012. Maybe for Willis, is this the rate that we should be thinking of longer term or should that be trending higher long term? Thanks.

Willis Newton

The tax rate at 30.5% is our best estimate for 2012 and that reflects the tax preference items that are currently recorded on the books. We take each year as it stands, but we would expect the tax rate to be somewhat in line as we go forward.

As a follow up to the earlier question, our blended rate of loan originations in the first quarter was around 3.25 and we think that this quarter it was around 10 basis points less.

Jim Herbert

Steve, the tax rate’s not trending higher, to answer your question.

Steven Alexopoulos – JPMorgan

Okay, perfect. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Aaron Deer with Sandler O’Neill & Partners. Please proceed with your question.

Aaron Deer – Sandler O'Neill & Partners

Hi. Thanks for taking my question. Kind of synthesizing some of the ideas previously discussed with respect to the pipeline and margin, over the past several quarters you’ve been growing net interest income by about $40 million year over year. Is that a sustainable piece or at what point do we start to see that slow down somewhat?

Willis Newton

Well, Aaron, one of the reasons why we’ve raised the capital is because we think we have the opportunities to continue to attract clients and to originate loans and to have a higher average balance sheet, so I think what we’re trying to do is to continue to build on the strengths of our balance sheet and trying to continue that as part of our overall strategy in our execution. Katherine?

Katherine August-deWilde

We have, as you know, hired a lot of relationship managers over the last two years. Most of them originate safe home loans and they’re beginning to click into place, and as they do, their clients that they acquire follow them. We continue to do this very safely with the same very conservative underwriting standards, but the larger production machine we now have will allow us to continue to grow.

Jim Herbert

Aaron, it’s Jim. One of the things going her is that we, by luck or by choice, are in good markets that are actually quite active, and so the opportunity to develop a growing number of new relationships for us, and we are 100% focused on relationships, is unusually good at this moment, and good both in number and in quality, so we’re doing our best to take good advantage of that while it exists.

Aaron Deer – Sandler O'Neill & Partners

That’s great, and the performance has obviously been impressive. As you continue to grow, and it sounds like you’ve had some excess liquidity. You’re continuing to put that to work, but your loan to deposit ratio’s up now to about 105%. What are the thoughts on taking that higher and might we see deposit rates start coming up a little bit as we maybe try to generate a little bit more funding on that side?

Jim Herbert

We have basically tried to keep ourselves funded strongly with deposits. The reason we’re at 105 is basically the FHLB advances in there. The FHLB advance level is at a level that we like at this point and we would expect it to be stable for a while, so our deposit growth has been reasonable parallel to the loan growth and we would expect that to continue.

Aaron Deer – Sandler O'Neill & Partners

Okay. With respect to the FHLBs that were added recently, what was the rate on that?

Willis Newton

The $1.0 billion that we added was at about 1.4%, but for the quarter our average borrowing costs were around one eight, and that’s on advances, which have a remaining term of 4.25 years.

Aaron Deer – Sandler O'Neill & Partners

Okay, that’s great. Thanks so much for taking my questions.

Operator

Thank you. Our next question comes from the line of Erika Penala with Bank of American Merrill Lynch. Please proceed with your question.

Erika Penala – Bank of America Merrill Lynch

Good morning. My question is a follow up to that of Steve’s. I know that Katherine alluded to some of the investments tapering off a little bit in terms of expansion. I guess as we look forward to the next year, I’m wondering, Jim, on an operating basis, where do you think the efficiency ratio of this company can go with most of the -- with assuming that a chunk of the build out is behind you?

Jim Herbert

Erika, I think that, first of all, we’re comfortable in the guidance that we provided in the past of 58% to 62%. This -- We’ve got a couple quarters here where the increase in or the results of our investment spending are going to be up on us. We’ve said that, I think, before, but longer term, I would hope we could operate in the low end of that range, but it’s going to take a while to get there. It’ll take a while to get there, and of course, the narrowness of net interest margin has an impact on that because it is a ratio.

Erika Penala – Bank of America Merrill Lynch

Got it, thank you.

Operator

Thank you. Our next question comes from the line of Joe Morford with RBC Capital Markets. Please proceed with your question.

Joe Morford – RBC Capital Markets

Thanks. Good morning, everyone.

Jim Herbert

Good morning, Joe.

Joe Morford – RBC Capital Markets

I just wondered if you could talk a bit more about the types of securities purchased in the quarter and the yields you’re getting currently, and I guess related to that, if you could just update us as to how big the muni portfolio was at the end of the period? Thanks.

Willis Newton

Sure, Joe. The municipal portfolio represents the lion’s share of our held to maturity investment securities, so it was about $2.2 billion at the end of the quarter. We added about $200 million to our investments during the quarter. About half of that was in the muni’s. The yields that we are looking at are down just a touch, but on a tax equivalent basis they’re still very attractive.

Joe Morford – RBC Capital Markets

Okay, and do you have any kind of target as to how big that -- or how much bigger you’re willing to let the muni’s grow as a percent of the portfolio?

Willis Newton

Well, we would think that the investments in general would grow with our balance sheet as we go forward. Once again, we have such a strong component of mortgages in our loan portfolio. We look to have other types of investments in our investment securities portfolio. I wouldn’t expect the muni’s to grow. The rate of growth will slow down because we’ve now reached a diversified portfolio that’s in the range of 8% to 10% of our total assets.

Joe Morford – RBC Capital Markets

Okay, and just lastly, the -- recognize the average cash balances were higher in the period, but on an end-of-period basis it looks like they were down to right around $800 million from $1.4 billion last quarter. I was just curious how much lower would you be willing to take that cash balance down or is there some kind of minimum level that you like to operate on, either dollar amount or percentage of assets or something like that?

Willis Newton

We’re actually seeing good deposit flows and our cash balances are back up after the quarter end. We have clients who have some seasonal flows in and out and we could achieve lower cash balances, significantly lower than that, and we used to be an overnight borrower from the Federal Home Loan Bank. I think we’re a long way away from that at the present time.

Joe Morford – RBC Capital Markets

Okay, thanks so much, both.

Operator

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Please proceed with your question.

Casey Haire – Jefferies & Company

Hi. Good morning. I just had a quick question on the provision, a little surprised to see it stay flat despite the pickup in loan growth. Just any color there, I’d appreciate.

Jim Herbert

The provision was driven primarily by allocation relative to our growth in loans, as you know, the new loans of growth, but Willis, do you want to provide some more color to that?

Willis Newton

Right. I think we have a very comprehensive model in that the provision will continue to grow as the net new loans grow. It depends a little bit on the types of loans, but with the economy strong and our loan performing very well, we’re comfortable that we’re adding an appropriate amount of provisions as we go for these loans.

Casey Haire – Jefferies & Company

Okay, and just a follow up on the FHLB draw, Jim, you said you’re happy with where you are right now. The FHLBs, I think, only went up $100 million on the quarter, which was a strong loan growth quarter. It sounds like the pipeline is still strong. I would have thought that given your guys’ commitment to keeping the book matched that we’d have another FHLB draw coming shortly. Just trying to reconcile that.

Jim Herbert

Well, two things, actually. One, we’re in pretty good shape going into the quarter, as you know. We were running about 7% asset sensitive. That gives us room to maneuver, particularly in the current climate. In the quarter, the Fed’s indication of extended low rates basically added about a year. We all have our opinion on that, but they’re currently not shortening their target time.

And last, the growth and the liveliness of the secondary market for resale of loans has picked up and our ability to lay off any term loan that we want, quite frankly, is quite extraordinary, and so we have more maneuverability on the asset side than we previously had and the need to emphasize the liability side has declined a bit.

Casey Haire – Jefferies & Company

Okay, got you, and just last one, just the model question, the preferred issue coming on mid-quarter, is the rate quarterly dividend, is that around six or just under $6 million or so?

Willis Newton

Joe, that’s right. It’s about $775,000 a month so we’ll be at about five seven for the quarter.

Casey Haire – Jefferies & Company

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Brian Zabora with Stifel Nicolaus. Please proceed with your question.

Brian Zabora – Stifel Nicolaus

Thanks. A question on loan growth. I just want to get a sense of how loan growth was in say the northeast or maybe the LA market compared to your home San Francisco market.

Katherine August-deWilde

Loan growth was quite strong in all of our markets. As you all know, the Bay area is particularly strong, but we had good loan growth and we had added strong bankers in each of our markets and all of our main markets are actually doing very well.

Brian Zabora – Stifel Nicolaus

Thanks for taking my question.

Operator

Thank you. Our next question comes from the line of Herman Chan with Wells Fargo Securities. Please proceed with your question.

Herman Chan – Wells Fargo Securities

Thanks. I wanted to drill down on the growth in the commercial business loans. Was the growth concentrated in capital core lines of credit or was it more broad based, and also, I want to get your thoughts on the outlook for commercial loans and the pace of hires going forward, and would the hires be concentrated within the San Francisco markets? Thanks.

Mike Selfridge

Hi, this is Mike Selfridge and I would say the growth in the business banking side was centered on our business directed toward private equity. That was coupled also with our lending to nonprofits and schools, so we saw an increase in commitments for the quarter and a slight increase in the utilization.

As far as the team we have in place, we have a very strong team in place. They work well with the relationship managers, but I wouldn’t comment on our future hiring plans for business banking, nor our growth opportunities. We think they’re going to continue, but I wouldn’t say at what pace because I don’t have that information.

Herman Chan – Wells Fargo Securities

Okay, great, and a question on the purchase accounting accretion. On the loan side, it looked like it ticked up in the quarter. Can you add some color on the dynamic scene there and also on the loan types that drove the accretion higher?

Willis Newton

Yes. Hi, Herman, this is Willis. The purchase accounting accretion is directly related to the payoff of loans that were purchased and had the discounts on them. We did see continued high rates of repayment in the high teens to low 20’s for all of our property types, commercial real estate, multifamily and single family so it was pretty much across the board.

We do provide information about the remaining net unaccreted discount is right around $409 million. A portion of that is more of a credit reserve, say $25 million to $30 million, and the balance is the remainder that will be accretable as those remaining $10.6 billion worth of loans payoff.

Herman Chan – Wells Fargo Securities

Okay, thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Tim Coffey with FIG Partners. Please proceed with your question.

Tim Coffey – FIG Partners

Thank you. Good morning, everybody. I just want to circle back on, I think Katherine was talking about it, the yield on new originations of home mortgages. Did you say those -- that was 2.7?

Katherine August-deWilde

The five-year fixed rate loans are coming on at about 2.67 in this quarter and the income property loans are coming on at higher rates in the mid threes and the business loans tend to be priced around prime.

Tim Coffey – FIG Partners

Okay, great. And since most of my other questions have been answered, I do have one question about the First Republic investment management, the assets under management. Is there any kind of seasonal impact in there?

Katherine August-deWilde

There wasn’t a seasonal impact. The assets increased for several reasons. The primary one is the new wealth managers that we hired were very successful in bringing their clients over. We’re also doing a better job in increasingly of cross-selling our bank clients.

Tim Coffey – FIG Partners

Okay. Do you have any indication that this is sustainable, the growth?

Katherine August-deWilde

We can’t tell you whether it’s sustainable, but we have continued to hire strong wealth managers.

Tim Coffey – FIG Partners

Okay, very good. Thank you. Those are all my questions.

Operator

Thank you. Our next question comes from the line of Joe Hall with Sandler O’Neill Asset Management. Please proceed with your question. Mr. Hall, would you like to re-queue to join the queue, sir?

Thank you. Our next question comes from the line of Julianna Balicka with KBW. Please proceed with your question.

Julianna Balicka - KBW

Good morning. I have a follow up question on some of the loan momentum you had referenced earlier in your remarks about purchases in terms of your new loan originations. What is the momentum and outlook that you’re seeing in the refinance business? Is there going to be a point where that slows down and runs out? So, what are your thoughts around that please?

Katherine August-deWilde

That depends very much on interest rates. As interest rates continue to decline, clients of ours, but even more significantly, other banks’ clients tend to refinance their loans and that leads to the increased refinance volume, so it’s quite separate, but the rates are what funds and what drives refinances. Obviously, lower rates also drive purchases as well as the strength in the economies in our particular markets.

Jim Herbert

Let me make a point there if I could. Refinance volume is in some ways negative to us to the extent that the refinance volumes of our outstanding portfolio that might have higher rates on it, but generally speaking, refinance volume is very positive for us because clearly our book versus the universe of available clients of other institutions that are refinancing with them, and possibly out in the market looking for a chance to change relationship, provides us with a far greater opportunity than it does challenge on our own balance sheet.

So, generally speaking, refinance moments like this, albeit rate challenged, are ripe with relationship establishment opportunities. We take a very long-term view of the business, and so moments like this are rare and provide tremendous relationship-building opportunities that come along every once in a while.

Julianna Balicka - KBW

Do you have a sense of the refinance originations, how much that came from outside versus inside the bank?

Jim Herbert

No, we actually don’t. We could track that. We don’t.

Julianna Balicka - KBW

Okay, thank you very much.

Operator

Thank you. Mr. Herbert, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Jim Herbert

Great. Thank you all very much. We really appreciate your time. Just a quick couple of emphasis points. We are challenged by the rates, most are, however, the book remains extremely clean in credit. Our markets are very strong and very active, which provides us with an extraordinary number of relationship opportunities, which we’re pursuing aggressively. Thank you very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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